Microsoft Word cba4205200908 Advanced International Banking

[10 marks] 

TOTAL 

 

         [25 

MARKS] 

 

 

 

 

 

 

 

 

QUESTION 2 

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NUSTCBA4205AUGFINAL2009 

3

a.  Distinguish between the purchasing Power Parity theory and the Interest rate 

parity theory of exchange rates 

 

 

 

 

 

[10 marks] 

b.  Using the PPP theory, estimate the South Africa/Zimbabwe dollar spot exchange 

rate given the following: South Africa /Zimbabwe 6-month forward exchange rate 

is ZAR1 = ZWD7.100. Inflation rates in Zimbabwe and South Africa are 25% and 

10% respectively and are not expected to change in the near future. State all 

assumptions 

you 

make 

 

 

 

 

       [12 marks] 

c.  One of the general conclusions made from the tests conducted to examine 

whether PPP exists is that PPP holds up well over very long run but poorly for 

shorter time periods’.  What are the implications of this conclusion to corporate 

treasures and portfolio managers?